Category: Startups

This past Friday was Career Day at Ankeny Centennial High School (the high school near me). They invited me to talk about what I do in my career. I gave them several options (software engineer, consulting, entrepreneurship/startups). I was asked to speak on entrepreneurship.

Rather than just talk about me, I thought it’d be more fun (for me, but especially them) to show them how to create their own successful startup businesses.

In one of the three sessions I told the students that I was considering setting up some kind of extra-curricular “create your own startup” class, where I would mentor high-school-level students and help them create a business over the course of a semester. There seemed to be a lot of interest in it, so we’ll see where that goes.

I was recently asked about my thoughts on NestMint. Specifically: “Do you think it’s valuable to the community? Why? What impact do you foresee this investment fund having on the overall economic health of our startups in Iowa?”

I’m no expert on the subject, but here are my thoughts:

I definitely think there’s value to the community in NestMint. To me it feels like the money portion of a startup accelerator.

Prior to business validation, most entrepreneurs use their own money and possibly money from friends and family to start building their company.

Before NestMint, the standard advice to startups (in Iowa) thinking about raising money was to “build it first and prove the business (via traction, etc.) and only then seek angel investment”. That’s still good advice (and that’s what I’m doing with Locusic), but doing it that way usually means building the startup part-time. That’s because you still need to keep your day job to earn a living – unless you’re fortunate enough to have three to six months worth of living expenses in the bank. So, because you’re only working on the startup part-time, things take a bit longer. And because you still have a day job there’s less of a sense of urgency to make your startup succeed, so things take a bit longer still.

NestMint gives another option for early stage startups in Iowa – especially for younger entrepreneurs whose expenses are lower. Seed, or idea-stage, financing from NestMint could allow a startup’s founder(s) to focus 100% of their energy and time into building their new company. And when you’re able to go “all-in” there are many psychological effects in play that pressure you to succeed (or not fail).

Possible negatives:

The requirements to apply seem a bit onerous to me – specifically the business plan and financial plan. It’s a bit ridiculous to require a “plan” for a startup at the idea stage, since you really don’t know what you’re building yet. Your plan will most likely be flawed, so if you precisely follow it you will most likely fail. Startups at this stage need the flexibility to pivot to different business models as they learn new information about their customers, market, etc. If I didn’t know better, I’d think that the NestMint fund might be a bit out of touch with the dynamic nature of startups. But knowing that Mike Colwell and Tej Dhawan (two key supporters of the Iowa startup ecosystem) are involved with NestMint, I bet I just don’t understand enough of the details about these requirements, or what they mean by “plan”. The site alludes to a plan “template”, but it hasn’t been posted yet.

Contrasting with an accelerator:

A startup accelerator, like Y Combinator, Techstars, Gener8tor, or the new Iowa Startup Accelerator, provides similar amounts of financing for startups. Y Combinator hopes to get one “home run” out of the 50 or so startups they accept for each “class”. Y Combinator accepts only the best of the best of early stage startups from around the world, they provide world class mentoring, and their startups are immersed in a culture of other startups all working very, very hard to achieve success.

NestMint will only be accepting applicants from Iowa. They may accept applicants from early-stage companies other than high growth potential startups. It’s unclear (to me) what kind of mentoring or other scaffolding will be in place, if any, to help their companies succeed. I hope the NestMint investors are realistic and the fund won’t be called a failure if it doesn’t get the same rate of return as a world-class accelerator.

To me it seems a bit easier to apply to an accelerator than for financing from NestMint. Although, it might be easier to actually receive financing from NestMint than be accepted to an accelerator.

Accelerators usually require the startup to relocate to near the accelerator’s location, at least temporarily. With pure financing from NestMint, an Iowa startup could stay where they are – around the resources, talent, and potential customers they already know.

I’m interested in or curious about:

what kind of additional mentoring, if any, that NestMint financing recipients will receive from the people backing the fund.

which kinds of businesses, besides high growth potential startups, will receive funding.

what additional burden does taking this funding put on the entrepreneurs (e.g. paperwork, reporting to the partners, a board seat?).

for the more successful startups that receive NestMint funding, will the people (managers, investors) behind NestMint help those startups secure additional (A round) financing?

If the fund continues to invest in startups over the next several years (and they evolve and work out the kinks during that time), I think it could be a key contributor to the success of the Iowa startup community.

The payment network company, Dwolla, recently went from pretty cool to wickedly awesome.

Dwolla Background

If you don’t know, Dwolla let’s you move money to anyone else (I believe just in the US so far) for much cheaper than a credit card transaction. For payments under $10 it’s free and for over $10 it’s a flat 25 cents – even if you transfer like a million USD. A typical credit card network charges its merchants about 30 cents plus 3% of the transaction amount per transaction – plus you need to pay for a gateway and all kinds of stuff. Basically credit cards suck for merchants, but they’ve been the defacto standard.

Moving Money

In order to pay someone with a check, you need to have the funds in your checking account. If you want to pay with a credit card, you need to have the funds (credit) available in that account. Likewise to pay with Dwolla you have to have the funds in your Dwolla account.

In order to pay a merchant, you must agree on a form of payment. If you want to use Dwolla to pay a merchant, they have to accept Dwolla (just like if you wanted to pay with a check, Discover, American Express, Visa, or even cash – all of which have merchants that don’t accept them).

My Problem

One time, I wanted to buy a bunch of custom T-shirts from 8|7 Central. They accept Dwolla. I wanted to use Dwolla to save them the transaction fees (on roughly a $1000 purchase). Plus they had a promotion going on at the time for those using Dwolla.

I had the funds in my bank account. So I needed to move money from my bank account into my dwolla account (kind of like moving money from a savings account into a checking account so it’s available to spend via a check). However, moving those funds from my bank account into my Dwolla account took a while – because that transfer ran over the outdated ACH network (what banks and credit card companies use to transfer money).

Because of that transfer process, I haven’t used Dwolla as much as I would like. I want to be able to make a payment decision in an instant and don’t know if I’ll want to use Dwolla in a couple days and don’t know how much that payment might be. One option might be to just keep a couple thousand USD in my Dwolla account just in case – like you might with a checking account. However, money in my Dwolla account doesn’t feel as liquid to me as money in my checking account – since way more merchants accept checks and debit cards than currently accept Dwolla.

What Dwolla Did

Two days ago, I got an email inviting me to the beta of DwollaCredit. Yesterday I finally thought I’d have a bit of time to go through it all, so I clicked the link in the email. I logged into my Dwolla account and looked through the terms. My big take-away is that if you carry a balance past the due date, it’s like 25% APR. Also you can pay the credit account, which is setup through Comenity Bank, with Dwolla. So I clicked the “Apply” button (expecting to be taken to the next series of steps) and BAM! “You’ve been approved for $10,000.” That was it.

Now whenever I feel the impulse to buy something, and the merchant accepts Dwolla, I can use Dwolla – without worrying whether I have the funds in my Dwolla account (assuming the purchase price is less than $10K). Then with a couple taps on my phone, I can move money from my bank to dwolla and then pay off the credit account – which definitely won’t take 30 days – so I won’t have to pay the interest fees on the credit account. Now if Dwolla had a setting where I could automatically pay the credit line from my Dwolla-linked bank account that would be even wickeder awesomeness. :)

Also, when I talk (and write) about entrepreneurs, I’m generally talking about startup entrepreneurs – the people that found and run startups, as defined above.

There are many new businesses that aren’t “startups” – such as restaurants, stores, plumbers, construction companies, CPA firms, etc. These businesses still have uncertainty (most businesses fail within the first few years), but they don’t have unknown and untested business models like a true startup.

For example, if you’re opening a restaurant, the structure of your business model will be the same as that for about any other restaurant. You know where your expenses and revenues will come from. Sure, you’ll have different costs, partners, clientele and competitive advantages from your competitors; and your success will be uncertain and you will work very hard to try to ensure your success. But unless you do something revolutionary with the standard restaurant business model (e.g. giving away the meals for free), your business is not a startup.

I own and run two different businesses. One is a startup and one is not. The non-startup is a custom software consultancy. It works pretty much just like all other similar businesses. I’m not doing anything fancy with the business model because I don’t have to – it works just fine the way it is.

My startup is quite different. I’m trying to create something brand new in the world. Its value proposition isn’t fully verified. I don’t know who the eventual customers will be. The business model is continually evolving – it may end up being one of (or a combination of): ad-based, freemium, multi-sided, or virtual goods.

Another startup I’m involved with is in the education space. I’m working with some administrators in the Ankeny, Iowa school district to reinvent education. We’re working to create a new system of education and are unsure how it will turn out or what it will look like when we’re done. Our effort matches all three parts of the definition of a startup and we are thus startup entrepreneurs.

In this example, whether it’s a startup is not as obvious. However, I choose to think of it as a startup because it’s then more natural to think about applying principles and techniques designed to help startups (such as those in the Lean Startup movement) to our endeavor, and thus increase our chance of success.

(I’m sure I’ll write more about the Lean Startup and related principles and techniques in future posts.)